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Small cap's flight from darkness

May 9, 2019

By Catherine Yoshimoto, director, product management

February 5, 2018 was a dark day for US equities. The Russell 1000 Index plunged 4% in a single day and the rout spared virtually no areas of the US markets, including US small cap equities, which were knocked into negative territory for the first time in 2018. But small caps have since staged a recovery—both from a price and volatility perspective.

The impact of the single-day market crash in February of last year had an immediate and profound impact across all US equities. As shown below, US equity losses on February 5, 2018 ranged from -3.5% to -4.5% across market cap segments.

However, this chart also tells the story of recovery since the single-day plummet over 15 months ago. US equities remained crippled by the selloff one week later, broke even three months later and steadily picked up steam until posting considerable gains for the six-month period following the crash.

Some gains were erased when the nine-month period captured the beginning of the fourth quarter 2018 downturn—and the 12-month period captured the selloff in its entirety, sending small caps into negative territory for the period. But the markets have subsequently recovered, and US equities across all market caps have delivered considerable gains for the 15-month period.

The story has been similar with respect to small cap volatility. As shown below, the Cboe Russell 2000 Volatility Index (RVX)—which measures US equity market implied volatility—spiked sharply on February 5, 2018. However, it subsequently dropped and held steady at a lower level until the market turbulence at the end of last year. And it has since dropped and held steady again through the end of April.

The beginning of May has seen a brief outbreak of volatility, triggered by concerns of escalating US/China trade war tensions. And although the path forward remains to be seen during these times of uncertainty, it seems a fitting time to look at past instances of volatility—and to reflect on how resilient the markets can be.

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